2012 Investment Outlook Kevin Rendino Sr. Portfolio Manager BlackRock Basic Value January 18, 2012
The US economy continues to muddle through yet again US Economy P ositives Negatives • Increasing growth in employment • Still high unemployment • Strong corporate earnings • Low business and consumer sentiment • Stable cost structure • Weak housing market • Low and falling inflation • Fiscal tightening • Improving consumer credit growth • Poor real wage growth • Good labor productivity • Households deleveraging • Banking system on the mend • Politics • Politics
The US economy continues to muddle through yet again US unemployment rate 10 8 6 4 2 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: ISI. Data through November 2011.
US earnings grow but more slowly than past 2 years S&P 500 Per Share Profits Consensus Estimate Full year Growth @ Jan. 1 2009 $60.80 2010 $77.00 $85.28 +40.3% 2011E $95.50 $97.00E +13.7% 2012E $107.78 $103.00E +6.2% Source: Brown Brothers, BlackRock
Business Loans Improving
Consumer Loans Improving
US equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession S&P 500 Target: 1350+ Components of Return • Yield 2% • Earnings 6% 1250 1325 • P/E improvement 2%+ 1325 1350+ Total return: 10%+
US equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession Multiples to remain low Multiples to rise • Lack of investor demand (historic • Current risk aversion lasted longer returns zero) than any since 1930s • Aging population • Absence of recession, high inflation, high interest rates • Concern about profit margins • At historic extreme (like WWII, • Uncertainty premium Korea, high inflation) • Sovereign debt risks (Europe) • Dividends rising • Buybacks and M&A Possible Catalysts – US economy ok in 2012 – Absence of Euro collapse – Some political uncertainties resolved – Housing bottoms
modestly for the first time since the Great Recession US equities experience a double-digit percentage return as multiples rise Source: Deutsche Bank S&P 500 P/E history 10 15 20 25 30 5 Dec-28 Dec-30 Dec-32 Dec-34 Dec-36 Dec-38 Dec-40 Dec-42 Dec-44 Dec-46 Dec-48 Dec-50 Dec-52 Dec-54 Recession Dec-56 Dec-58 Dec-60 Dec-62 Dec-64 Dec-66 Dec-68 S&P 500 Trailing P/E Dec-70 Dec-72 Dec-74 Dec-76 Dec-78 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 Average Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16
US equities experience a double-digit percentage return as multiples rise modestly for the first time since the Great Recession Stocks cheap, bonds expensive, housing bottoming Average Bond “P/E” Average House “P/E” Average S&P 500 Trailing “P/E” by Decade by Decade by Decade (100/10-Year Treasury Yield) (US Median Home Price/Median Rent) 51.9 25x 55x 25x 21.8 19.5 20.1 45x 18.7 20x 18.1 20x 17.9 16.2 35x 15.2 15x 13.1 15x 12.5 23.1 11.7 21.1 25x 11.0 15.5 13.6 10x 10x 15x 9.9 5x 5x 5x '60s '70s '80s '90s '00s Current '60s '70s '80s '90s '00s Current '60s '70s '80s '90s '00s Current Source: Strategas Research Partners
Dividends and buybacks hit a record high Buybacks Plus Dividends ($ billion) 1990 145 2001 324 1991 132 2002 329 1992 144 2003 350 1993 156 2004 491 1994 170 2005 706 1995 222 2006 858 1996 254 2007 1050 1997 298 2008 761 1998 363 2009 587 1999 372 2010 652 2000 353 2011E 880 Source: FactSet, J.P. Morgan
Dividends and buybacks hit a record high Percentage of profits used for dividends or buybacks 90% 84% 80% 78% 70% 65%65% 57%59% 63% 60% 52% 55% 48% 47% 54% 46% 46% 50% 43% 43% 37%38% 40% 41% 37% 32% 33% 30% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 annualized Cash Return as a % of Corp Profits Source: J.P. Morgan
WHAT COULD GO RIGHT? • Europe moves toward resolution • US heads toward fiscal responsibility • US manufacturing renaissance develops • Housing recovery in US commences • Consumer and business confidence improves WHAT COULD GO WRONG? • Eurozone debt crisis becomes a systemic banking crisis • US heads back toward double dip • China has a hard landing • Political divide in US widens; class warfare breaks out • Middle East tensions cause $150 oil
The European debt crisis begins to ease even as Europe experiences a recession Eurozone progress 1. ECB guarantees European bank access to funding (removes possibility of a bank liquidity crisis) 2. ECB to be lender of last resort for banks, but not for government bonds 3. Measures of fiscal discipline agreed upon; enforcement mechanism uncertain 4. Eurozone rating downgrades likely 5. Government hiring freezes and capital spending cuts insure Eurozone recession 6. Earnings estimates for European companies to fall further 7. Political decisions continue to trump economic decisions
Despite slowing growth, China and India contribute more than half of the world’s economic growth GDP growth forecasts, 2012 Forecast contributions to global GDP growth 7.9 8 7.2 2011 2012 7 Global growth (% y-o-y) 3.7 3.2 6 Contributions to growth (pp): 5 Developed markets 0.8 0.6 Percent y-o-y 4 3.2 United States 0.4 0.5 3 2.3 Euro area 0.3 -0.2 1.9 2 United Kingdom 0.0 0.0 1 0.4 Japan -0.1 0.1 0 Emerging markets 3.0 2.6 -1 China 1.6 1.4 -1.0 -2 India 0.5 0.5 EA UK Japan US Global India China Note: Contributions to growth are on a purchasing power parity (PPP) basis. Source: Nomura Global Economics
Despite slowing growth, China and India contribute more than half of the world’s economic growth Emerging Market Economies P ositives • Strong domestic demand growth • Rising productivity • Positive employment growth • Rising real wages • Consumer purchasing power growth Negatives • Slowdown in Europe • Inflation concerns • Scattered asset bubbles • Rising labor costs • Political tensions
Basic Value Key Investment Professionals Team members average over 19 years of investment experience • Portfolio managers define investment process and strategy and make buy and sell decisions • Portfolio managers and research analysts conduct fundamental research on all potential investments • Manage $11.3 bn dollars Basic Value Team draws on BlackRock’s broad resources • Risk & Quantitative Analysis • Equity & Fixed Income Research Analysts Portfolio management team Carrie King (25) Kevin Rendino (23) Associate Portfolio Manager Senior Portfolio Manager Health Care, Media, Defense, Telecom BlackRock basic value resources Research Analysts Product Specialist Geri Gunn (28) Brooke Williams (13) Scott Malatesta (19) William Rubin (18) Chris Parliman (10) Consumer Discretionary, Information Technology, Product Specialist Energy, Utilities Financials Consumer Staples Industrials ( ) years of investment experience 31 December 2011 17 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT TO BE SHOWN OR DISTRIBUTED TO CLIENTS
Basic Value philosophy and core beliefs A portfolio of strong business franchises, purchased at the right price, outperform over a market cycle • The price we pay relative to the business we buy is the most important driver of investment returns • Markets overreact to near-term internal or environmental challenges creating attractive valuations • Out-of-favor companies and industries create opportunities to identify investments that offer asymmetric return-to-risk potential • Companies with strong franchises, managements, and balance sheets are the best positioned to turnaround, gain market share, and improve profitability in an industry recovery FOR FINANCIAL PROFESSIONAL USE ONLY – NOT TO BE SHOWN OR DISTRIBUTED TO CLIENTS
BlackRock Basic Value: Portfolio Positioning Balanced approach with cyclical exposure through Information Technology and Energy offset by positions in more defensive sectors of Consumer Staples, Healthcare and Telecommunications Focus on market leaders • Solid balance sheets • Strong competitive positions • Proven management teams • Attractive valuations • Strong cash generation • Dividend increases • Share repurchases Continued concentration on stock and sector selection vs. broad market trends FOR FINANCIAL PROFESSIONAL USE ONLY – NOT TO BE SHOWN OR DISTRIBUTED TO CLIENTS
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